The banking industry in Ethiopia faced uncertainties that pose a threat for the success of banks.rnAmong the major threats, exchange rate is the one which influence banking financialrnperformance.The aim of this study is to examine how exchange rate affects performance ofrnprivate commercial banks in Ethiopia by using panel data of eleven sample private commercialrnbanks over the period of 2009/10-2017/18.The secondary data analyzed using descriptivernstatistics, correlation matrix and random panel regression model.The internal factors used inrnthis study include loan growth, lending interest rate, Bank size whereas; the external factor isrnforeign exchange rate, real GDP growth and inflation rate. Moreover, Return on assetrn(ROA)was used to measure the banks performance.The empirical finding of this study revealsrnthat at 5% level of significance exchange rate depreciation and loan growth has positive andrnstatistically significant influence on the performance of private commercial banks in Ethiopia.rnOn the other hand, lending interest rate, bank size, GDP growth and inflation have statisticallyrninsignificant influenceon the performance of private commercial banks. Based on the finding ofrnthe study, the study extends the following recommendations: the issues related to foreignrnexchange trading should always be taken into account in efforts to improve banksâ€™ foreignrnexchange transactions and financial performance. The banks management should adoptrnstrategies so as to mitigate foreign exchange risk since depreciation has influence in determiningrnthe performance of the private commercial banks. Furthermore, private commercial banksrnshould give adequate weight for foreign exchange risk management.